A shift in fashion from 'athleisure to denim' to impact sales at Lululemon, Canaccord says

Published Fri, Dec 2 20161:56 PM ESTUpdated Fri, Dec 2 20164:25 PM EST

An era of wearing athletic apparel in public may soon hit a wall as consumers choose dressier clothing instead, a trend that could impact sales at Lululemon , according to Canaccord Genuity analysts, who downgraded the stock to sell from neutral. "After a strong eight-year cycle, we believe the athleisure apparel trend has peaked," equity analyst Camilo Lyon wrote in a note to clients Friday. He thinks there's "growing evidence" that consumers are refraining from wearing athletic apparel such as yoga pants on the street and opting for denim instead. "The impact comes from the core customer opting to make one less purchase of yoga pants per year in favor of a pair of jeans. While we fully expect women to still wear yoga pants, we believe the pace of that purchase will moderate," he said. Lyon estimates that for the loss of each sale, Lululemon's comps could be hit by about negative 5 percentage points, given the company's heavy reliance on yoga pants. Investors may already be ahead of this trade, as shares of Lululemon have fallen 18 percent in the past three months. Lululemon, 1 year Source: FactSet Apart from industry trends, which show a deceleration in sales of athleisure apparel, the fashion industry appears to also back up these views. "We began hearing of denim gaining momentum at the summer footwear/apparel trade shows, and now more fashion footwear vendors/retailers are speaking to such trends (most recently at FFANY [Fashion Footwear Association of New York] this week)," Lyon said. Canaccord warns that rising inventory levels coupled with markdowns across the board, and increasing competition, could hit margins through 2018. "Given these mounting concerns, we believe LULU's premium valuation of 23x P/E is subject to multiple compression, thus slanting the stock's risk/reward distinctly negative," wrote Lyon. In the note, the analyst reduced his 12-month price target for Lululemon by 32 percent to $44 from $65. His new price target implies a 22 percent loss from where the stock closed Thursday.

A customer browses jeans at a Gap store in San Francisco.

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"After a strong eight-year cycle, we believe the athleisure apparel trend has peaked," equity analyst Camilo Lyon wrote in a note to clients Friday.

He thinks there's "growing evidence" that consumers are refraining from wearing athletic apparel such as yoga pants on the street and opting for denim instead.